Relationship Between Interest Rates and the Level of Investment in Uganda

CHAPTER ONE
1.0IntroductionThis study is about the relationship between interest rates and the level of investment in Uganda. This chapter presents the background to the study, the statement of the problem, purpose of the study, objectives of the study, research questions, and scope of the study, significance of the study, the conceptual model and the organizational setup of the study. 1.1Background to the study

Interest rates are likely to experience an up ward pressure as the central bank steps up efforts to curb inflationary pressures from increased government spending. However, the increase in interest on short term instruments such as treasury bills will be controlled by issues on long term bonds whatever the case. Commercial banks are not likely to significantly alter their plans to lend to the private sector beyond the existing strategies such that interest rates will remain higher many agents can afford (kakongoro, 2003). Literature on economic growth and development; Few economic ideas are as intuitive as the notion that increasing investment is a good way to raise output and income. The recent empirical research also supports this view the rate of investment is robustly and positively correlated with the rate of economic growth in cross country, long run growth regressions. Growth was constrained by lack of investment that in turn was constrained by lack of finance. Consequently, if financing was made available, it was argued, physical capital investment and ultimately, growth would follow (Reinikka, 2001). The rate of investment will be slower. This is so because the higher the rate of investment the higher the cost and lower is the rate of return. Consequently, the rate of return becomes equal to the rate of interest much quicker putting an end to further investment during a given period of time. The net investment will take place at the rate of return equal to the market rate of interest (Vaish, 2000). 1.2Key information and background of Uganda clays limited

Uganda Clays Limited was incorporated as a private limited liability company on 10 July, 1950 in Kampala, Uganda. On 4 March 1999, UCL was converted into a public limited liability company under section 33 of the companies Act. Uganda Clays limited is an important supplier of building clay products in the housing and construction industry. Its main business is the production and sale of roofing tiles, walling materials such as burnt clay bricks, interlocking and corner blocks, partition blocks, ventilators, suspended floor units, floor tiles, pipes, other building materials and decorative clay products such as grilles, flower pots, vases and other pottery. In the financial year ended 31 December, 1998, the company’s turn over was UShs 2.8 billion and the profit after taxation was UShs 98.6 million. For the six months ended 30 June, 1999, the accounts of the company showed a turn over of UShs 1.6 billion and profit after tax of UShs 133.9 million. Uganda clays Shortlisted on Uganda Securities Exchange in 2000, as a way of raising the share capital. 1.3Statement of the problem

Borrowing costs continue to raise concern as interest rates show no signal of coming down. Bank of Uganda, in a pre-emptive move to limit inflationary pressures is gradually increasing the bank rate (Mutebile, 2003). However, Ugandans are still faced with numerous bank charges that affect customers ability to invest or take up the new products commercial and financial institutions offer them (Mutebile, 2006). It is against the above knowledge gap that the researcher sought to examine the relationship between interest rates and the level of investment. 1.4 Purpose of the Study

The study sought to establish the relationship between interest rates and the level of investment in Uganda.

1.5Research Objectives
i.To identify the various types of investment
ii.To analyze the relationship between interest rates and the level of investment in Uganda. iii.To assess...

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The RelationshipbetweenInterest and Inflation
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...taxpayers will have to make up for the government liability.
2. The average rate of return on investment in large stocks has outpaced that on investments in T-Bills by about 8% since 1926 in US. Why, then, does anyone invest in T-Bills?
Answer:
This is because T-bill is regarded as an almost risk free asset as it is backed by the government. Therefore, it has lowest volatility as compared to stocks. This is also a reason that people tend to invest in T-bills instead of stocks.
3. You see an advertisement for a book that claims to show how you can make RM1 million with no risk and with no money down. Will you buy the book? Why?
Answer:
No. It is impossible to make RM1million with no risk and with no money down. This is because only a person who takes risk would be compensated with return. Even T-bills which is backed by the government also has low risk and it is impossible to earn RM1million with no risk at all.
4. You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interestrate of 8% per year and invest RM10,000 in the stock.
a. what will be your rate of return if the price of Telekom stock goes up by 10% during the next year? (ignore dividend)
Answer:
Return: 10,000 x 10%= RM 1,000
Interest to Pay: 5,000 x 8%= RM 400
Total...

...STEVEN
INVESTMENT MANAGEMENT
ACTIVITY 3
Faculty Use Only
INTRODUCTION
In contrast to the asset price world, there is no commonly accepted model for the movement of the underlying in the interestrate world. Consequently, there are a number of diﬀerent approaches to the pricing of ﬁxed-income products. The simplest approach is to price a product of the term structure of interestrates which also known as yield curve. This method is eﬀective for simple contracts, for instance bonds. Hiriyappa (2008)., This paper develops a technique of fitting a yield curve called “the term structure of interestrate” to observations on the prices securities with varying maturities and coupon rates. Also I will discuss the theories associated with term structure of interestrates, measure and describe the investment value of duration.
THE TERM STRUCTURE OF INTERESTRATE
The term structure of interestrates is also known as yield curve is a very common bond valuation method, Constructed by graphing the yield to maturities and the respective maturity dates of benchmark fixed-income securities. The yield curve...

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Now that we have an idea of how a bond's price moves in relation to interest-rate changes, it's easy to see why a bond's price would increase if prevailing interestrates were to drop.
If rates dropped to 3%, our zero-coupon bond - with its yield of 5.26% - would suddenly look very attractive. More people would buy the bond, which would push the price up...

...﻿The InterestRate
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InterestRates and Investors
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...STRUCTURE OF INTEREST? WHAT INFLUENCE DOES THE BANK OF ENGLAND HAVE OVER THE TERM STRUCTURE AND WHY IS IT IMPORTANT FOR MONETARY POLICY
To understand the term structure of interestrate we need to elaborate how interestrates function and how they are determined. Interestrates are a vital tool to all the macro-economic policy objectives of a government such as control of inflation, investment as well as employment. Interestrates refer to the price paid by deficit agents for borrowing funds from the surplus agents. A line that plots interestrate at a set point in time is the term structure or yield curve.
Interestrates which may be short term or long term are linked to a government’s macro-economic policy and future expectations of such a policy .The UK government uses Treasury bill and bond prices to implement its monetary policy. Bills, which are securities of less than one year until maturity show that there is an inverse relationshipbetween their price and short-term interestrates. Bonds, which are securities of more than one year to maturity also, have the same relationship to interestrates of short- or long –term. Due to the nature of maturity, bonds are more risky...